| 11.1°C Dublin

Brendan Keenan: Instinct is for severe fiscal action now, but science sadly lacking

IT was the first €2bn "giveaway" Budget and, my, weren't we excited. Yet, might it all have been different if, back in 2000, Charlie McCreevy had heeded the EU Commission warning that his Budget was too generous and his surplus too small?

Cheerful Charlie, the bookie's friend, got lucky. Shortly after came the dot.com crash, and a short sharp recession. Mr McCreevy could pour further scorn on Brussels by pointing out that his generous Budget had helped alleviate the effects of that recession.

Mr McCreevy was claiming, correctly, to have brought in a counter-cyclical Budget. But that had not been the plan. Mr McCreevy did have a plan, which he famously described as spending it when you'd got it, and not spending it when you didn't.

He gave this a formal structure by making use of the Department of Finance's curious convention that PRSI receipts are not revenue, but a deduction from spending.

So, when the economy was growing and PRSI receipts increasing, Mr McCreevy could spend more without adding to 'net' spending in the exchequer accounts. At the time, we probably did not query enough the ratchet effect if things were going the other way.

Mr McCreevy was the last in a line of finance ministers to have explicit rules for public spending.

Such rules were all the rage after the public finance crises of the 1970s and 1980s -- at least among economic cognoscenti.

Somehow, Gordon Brown managed to make his "golden rule" quite famous among the general chattering classes.

Brian Cowen as you might expect, had no explicit stance as Finance Minister. There seemed to be an unspoken rule, however, that a general government surplus of 1pc-2pc of GDP would cover all eventualities.

As we now know, it was disastrously too little. A politically unthinkable surplus of 5pc-6pc of GDP would have been needed. There is the rub. Fiscal rules and surveillance are back with a vengeance.

But does anyone really know what the rules should be, or what exactly it is they are trying to monitor? They did not seem to in the 2000s.

One of the many things we do not know about those bubble years is whether the Department of Finance gave clear advice to Mr Cowen that fiscal policy was far too loose. One hears anonymous claims that it did, but it is the detail that matters. If any such advice was given, how strong was it, and how official?

This is not just a question of Mr Cowen's reputation. We need to ask the same question of the EU Commission. It never invoked the rules of the Stability and Growth pact after its brush with Mr McCreevy.

Its subsequent warnings about the Irish budgetary stance were muted and concentrated on long-term liabilities, not imminent dangers.

In any event, the pact was more or less abandoned by 2005. Has the crisis really given the commission so much political independence that it can truly police national budgets -- and not just those of small, indebted ones. And does it know how?

The key figure in such discussions is the clumsily named structural budget deficit. It is meant to show the budgetary position if the economy were growing at its long-term sustainable pace, and it is a notoriously slippery concept.

John Fitzgerald of the Economic and Social Research Institute says that the commission counts Ireland's structural position in the wrong way and its conclusions are very wide of the mark. That is hardly re-assuring when the same commission is likely to have virtually the final say on the shape of Irish Budgets.

We do know that the commission's opinion on the structural budget went from near balance during the boom to an astonishing deficit of 9pc of GDP.

Was all of that always the honest opinion of its analysts, or did political considerations play a role in creating such a huge swing in opinion?

One of the surprising things about the current political debate is the reluctance of the opposition parties to say that, if elected, they will find the answers to these, and similar, questions and tell us what they find.

It seems a surefire vote winner, because the public wants to know who was to blame. But it would be just as important to find out if no one was terribly to blame, because no one really knew the extent of the risks they were running.

That may seem a ridiculous suggestion, but the important thing is the extent to which the authorities, at home and abroad, believed there was a problem in the Irish finances.

The eurozone is heading for a new fiscal framework where deficit countries in particular will have to frame their budget on the basis of outside economic analysis. One would like to have more confidence in the value of those analytical tools than past experience would give one.

None of this removes the need for urgent fiscal correction in Ireland. It does go to the heart of the debate about how to balance that correction with the requirement to sustain some economic growth.

The one thing that can be said for certain is that the EU target of a deficit of 3pc of GDP has no analytical merit. Like Mount Everest, it is there because it is there. The target date of 2014 seems based on the economically dubious idea that the sooner, the better.

My own instincts favour 'frontloading', where there is severe budgetary correction in the early years, on the grounds that it is better to clamp down early than have to keep choking off recovery with postponed corrections.

I am not yet going soft on that one but instinct -- even mine -- is no substitute for science, and the science seems sadly lacking.

Irish Independent